European long-term investment funds (ELTIFs) may not be new, but they are in vogue. Two were launched just last week – one by Candriam and Kartesia; the other by JP Morgan Asset Management (JPMAM).
Analysis by the Paris-based consultancy Indefi shows that the number of funds has quadrupled in the last two years, with 41 in operation at the end of 2024 (see figure).
A decade on from the original introduction of ELTIFs, regulatory changes last year appear to have helped overcome previous “false starts” with the product, according to Stéphane Blanchoz, head of alternative solutions at BNP Paribas Asset Management (BNPP AM). “Regulation was not really adapted for wide or mass distribution,” he says.
However, “the European Commission did great work taking feedback”, adds Blanchoz, and in January 2024 introduced new regulations, which he calls “a small revolution”.
Richard Bruyère, managing partner at Indefi, points to the technical standards which provide for some degree of control around liquidity. “That’s the main risk with these products: everyone wants out at the same time”, he says.
Blanchoz agrees that managers can “credibly manage liquidity”. JPMAM’s fund manages liquidity through a five-year lock-up, coupled with a 12-month notice period for redemptions. “These redemption terms allow liquidity to be sourced from across the portfolio, not just the more liquid parts of the portfolio,” the firm stated.
Regulation may have succeeded in squaring the liquidity circle, facilitating ELTIFs’ development. But the question remains: why launch them?
Broadening investor access
Turning to last week’s fund launches, although one is Europe-focused and the other more global, both share similar ambitions regarding broadening investor access.
But are ELTIFs a realistic diversification option for smaller pension funds? Blanchoz believes so: “Smaller pension funds did not really access private markets because […] they needed to commit a large amount of money and [could] be drawn into capital calls within one, two or three years. And sometimes the minimum ticket was too high. Now we have a framework into which we are not limited by the size.”
Bruyère agrees that many ELTIF products will be suitable for small institutions, describing the fees as high but “not outrageously high”, pointing out that some ELTIFs are lower priced than many traditional funds.
“Institutions are more and more reluctant to pay high fees and carried interest but would be ready to pay for liquidity,” he says.
The Draghi effect
Depending on the asset mix, ELTIFs can serve as a means to channel savings into the European economy. Candriam and Kartesia’s launch references the ability to “support local European economies”.
Certainly, something is needed to kick-start European economic growth. In 2010 European GDP was larger than that of the US; according to the IMF, it is now 14% smaller, and the OECD predicts it will be nearly a third smaller by 2040.
This challenge was addressed by Mario Draghi in his seminal report last year, which found that “€750-800bn in additional investment will be required each year” to boost European productivity.
“Draghi’s report is about finding the tools to finance the economy in a broader sense,” says Blanchoz. “Not only banks, but insurance companies, pension funds and asset managers need to be equipped to do that. The ELTIF is just a tool that enables this participation.”
For David Collington, wealth and asset management sector lead for KPMG’s Financial Services Regulatory Insights Centre, ELTIFs are part of a “wider competitiveness and growth agenda”.
Authorities in the European Union and the UK are currently considering a wide range of measures and approaches to kick-start growth.
Blanchoz points to the illiquidity premium in private assets. The key element for him is the potential growth trajectory. “Europe is less mature than the US, so it provides a field of opportunities that are much bigger than in the US,” he says.
Publicly listed Business Development Companies, which provide equity and debt financing to small and mid-sized companies have been around in the US for over 40 years, Blanchioz notes.
“Now the premium you get for investing in illiquid assets is less attractive in the US than in Europe”, he says.
He sees potential in Europe for “tens of thousands of companies who could access private equity or private debt”.
Read the digital edition of IPE’s latest magazine
No comments yet